Is a Buy-Sell Agreement Truly Necessary?

October 6, 2012 10:55 AM

A buy-sell is just as important as a marriage certificate

Throughout the succession planning process, the Esther family has made a lot of decisions. The buy-sell agreement between Chet Esther and son Ryan, and then another buy-sell agreement between Ryan and brother Chad in their new venture, might have been the toughest. A buy-sell
agreement spells out how, when and why an entity can be bought or sold by one of the owners.

"We started the process by getting a checklist from the Farm Journal Legacy Project website, which we took to our attorney," Esther says. "He looked it over and gave us homework, such as how to value the entity and how to determine permanent disability."

To help with those questions, the Esthers went to their accountant to get his insight and opinion on valuation and disability.

"That document has a lot more to it than I ever dreamed," Esther says. "When I start thinking about the five D’s [death, divorce, disability, dissolution and debt], I lose confidence in my decisions quickly.

"After going through this exercise, I realize it’s better to talk about it now than try to figure out how to compensate a grieving spouse so she can move on with her life after the fact," he adds.

The buy-sell agreement might be the most important but most misunderstood and unappreciated document in the succession planning arsenal, notes Kevin Spafford, Farm Journal succession planning expert. In its basic form, a buy-sell agreement ensures the business can continue in the face of disaster. It insulates the operation from unwelcome owners. A well-written buysell agreement might even function as a referee if an ownership group becomes stressed to the breaking point because of a disagreement.

Is a buy/sell necessary?

To help business owners decide whether a buy-sell agreement is truly necessary, Farm Journal succession planning expert Kevin Spafford has devised the following questions:

1. Is Ownership by Outsiders Undesirable? This factor is most common in family organizations, but it can exist in any organization in which an existing group (in this case, owners) is tight-knit. A buy-sell agreement ensures that ownership interests cannot fall outside the existing group without the group’s approval.

2. Is Ownership by Outsiders Subject to Approval? This is another common factor in the family enterprise, and it can be especially troublesome in a family farming operation where the existing owners are all immediate family and/or lineal descendants. The provisions of a buy-sell agreement should be written to ensure that all new ownership interests must be approved prior to transition.

3. Can Future Ownership Conflicts Be Foreseen? If the remaining owners have difficulties coexisting with family members or other co-owners, a buy-sell agreement can ensure that they are awarded first right of refusal for any interests that might become available due to death, divorce, disability or dissolution.